Question

Mallari and Chua are partners who share profits and losses in ratio of 3:2, respectively. They have the follo0wing capital balances on Sept. 30, 2015.

Mallari, Capital 250,000, Cr
Chua, Capital 500,000, Cr

The partners agreed to admit Palatino to the partnership.

a.Palatino paid Mallari 250,000 for 50% of his interest.
b.Palatino invested 250,000 for a one-fourth interest in the partnership.
c.Palatino invested 250,000 for a 30 % interest in the partnership.
d.Palatino invested 250,000 for a 20% interest in the partnership.

Answer 1

Interest on drawings is an income for the business, hence, it is added to the interest account of the firm thereby increasing the total income of the business. In common scenarios where interest on capital is charged by the owner, interest on drawings is also charged by the business.